Things to Know Before Selling to a Private Equity Firm

by Sherrie Scott

A private equity firm is a company that is not publicly traded in the stock market. This type of organization makes money through a variety of sources, including new product development, business management and mergers and acquisitions. Private equity firms purchase mature companies from owners who are ready to retire or take the company in a new direction. Selling a company involves much risk for both the buyer and seller. When selling a company to private equity firm, entrepreneurs must complete several months of due diligence to ensure the sale goes smoothly.

Business Goals

The seller must have a solid understanding of the private equity firm's goals before selling a business. Private equity firms have specific objectives to meet when deciding the type of business to purchase. Knowing the firm's objectives beforehand will eliminate speculation surrounding whether a firm is interested in a particular company. For example, if a private equity firm invests in only those companies whose earnings equal $5 million or more, it would be unproductive to consider the firm as a potential buyer if the selling company earns only $2 million annually. Often, the buyer's priorities and objectives will determine the successful completion of the sale and the continued success of the business after the acquisition.

Asset Allocation

An important element to consider when selling to a private equity firm is how business assets will be allocated or sold upon completion of the transaction. The company must know what business assets are for sale or amount of stock available for purchase. This will determine the private equity firm's prospective return on investment and help the firm analyze the overall risks of the investment. The seller should create an inventory list of business assets to include in the sales transaction to define specifically what the equity firm will purchase. The list should also include a directory of customers, intellectual business property and important background information of the business.

Financial Standing

An owner selling to a private equity firm must know what his business is worth before selling. Private equity firms assess a company's value based on it's cash flow and financial standing. Financial statements include balance sheets, which identify the company's assets, liabilities and overall net worth. Financial reports also include income statements, which outline the earnings and expenses of the business since its inception. Prior to selling, the business owner should take an objective look at the company's financial statements to determine its true monetary position.

Pricing Strategy

A private equity firm will price an acquisition based on the costs associated with the purchase as well as the prospective costs associated with managing the purchase before re-selling. The firm also considers the risks and costs of developing the new purchase. The seller must have current information regarding comparable sales and potential prices from several different private equity buyers. The seller should also know the availability and terms of the financing that will fund the sales transaction.

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